Step 1 - Evaluate All Your Savings Options
An IRA is typically a good tax sheltered saving option, but if you haven't contributed to your 401(k) - if you have one - up to your employer's matching limit, then additional 401(k) contributions should be your first priority. However, if you are taking full advantage of 401(k) matching, or don't have a 401(k), then an IRA is a great step to take.
Step 2 - Determine Which Type Of IRA You Need
A traditional IRA enables you to contribute money tax-free. Unlike the rest of your paycheck, which is taxed, your traditional IRA contributions are pre-tax, so you typically get money back at tax time. However, traditional IRA funds will be taxed upon withdrawal in retirement. If you are currently in a high tax bracket but expect to be in a lower tax bracket at retirement (fairly common), then a traditional IRA can be a good saving option for retirement.
A Roth IRA works in essentially the opposite way. Contributions are taxed going in, but not coming out. If you expect your tax bracket to rise in retirement, you should consider a Roth IRA.
Interestingly, if your tax rate remains fixed over time, then it makes no difference whether you pick a Roth or traditional IRA - you'll end up in the same place financially regardless. For more details on the differences between Roth and Traditional IRAs, continue reading here.
Step 3 - Determine How Much You Can Save
You can contribute up to $5,500 to an IRA per year, assuming you meet the income thresholds for your tax filing status. If you're 50 or over, you can contribute $6,500. Generally, it's good to save as much as you can in IRA given its tax advantaged status - this approach will help you meet your retirement goals.
Step 4 - Select A Brokerage
Most brokerages offer IRAs. At FutureAdvisor, we particularly like Fidelity and TD Ameritrade because of their low trading costs - many ETFs even trade commission free. However, any low cost brokerage can be a good option.